A complying superannuation fund is entitled to an exemption for income (both ordinary income and statutory income such as net capital gains) derived from assets which, at the time of derivation, are segregated current pension assets. Segregated current pension assets are assets held in reserve, invested or otherwise dealt with for the sole purpose of enabling the fund to discharge the whole or part of the fund’s current pension liabilities as they become due.
The Commissioner has issued a draft ruling which is not particularly remarkable but has created plenty of publicity about its taxation effects.
This draft ruling indicates when in the Commissioner’s view a superannuation income stream commences and ceases. Unremarkably the draft ruling says that a superannuation income stream ceases when there is no longer a member who is entitled, or a dependent beneficiary of a member who is automatically entitled, to be paid a superannuation income stream benefit from a superannuation interest that supports a superannuation income stream.
This will mean that any segregated current pension asset that existed to fund the superannuation income stream at the date the superannuation income stream ceased will also cease to be a segregated current pension asset. This will mean that any capital gain made on the disposal of that asset by the trustee of the fund will be subject to taxation under the CGT rules.
If is difficult to see why there was so much heat generated over the draft ruling. There is no additional taxation consequences generated by the ruling from what was always the case.
Even if a superannuation death benefit is paid to a non-dependant such as an adult child, there is no change in the taxation consequences created by the draft ruling. Any capital gain made within the fund from the disposal of the asset that is not a segregated current pension asset is taxed concessionally within the fund and the death benefit is taxed at 15% for any part of the benefit that has been taxed within the fund and 30% for any part that was not taxed within the fund plus medicare levy. There is no additional tax imposed as a result of the ruling unless taxpayers mistakenly believed that when an asset that became a segregated current pension asset, that asset always remained so, irrespective of the fact that the asset no longer supported a superannuation income stream.
However from a tax planning point of view, if an asset becomes a segregated current pension asset, then, subject to consideration of the effect of the general anti-avoidance rule, the trustee should give consideration as to whether or not to dispose of the asset within the fund while capital gains are not subject to income tax treatment rather than wait until the death of the member.